VMware's Multiple Catalysts Make It A Buy

Summary

VMware’s new suite of products should enable it to sustain its momentum.

VMware’s acquisitions look impressive as they are opening up key markets and clients.

VMware is seeing good traction as the need for connectivity and enterprise applications are growing.

Shares of virtualization infrastructure provider VMware (NYSE:VMW) are up more than 20% this year as the company is enjoying several catalysts. In addition, VMware's parent EMC's (EMC) wide customer base and growing suite of solutions are also a positive sign for VMware investors who can count on the company's outperformance to continue. With the continuous growth in data consumption across the globe and growth of virtualization, VMware should continue its strong performance going forward.

Growth areas

VMware is uniquely positioned to enable its customers to transition to the cloud. With its portfolio of solutions that extend from the desktop, to the data center, to the cloud, it is allowing IT teams to release resources from their client-server environments, and build the mobile cloud infrastructure that will drive their businesses going forward.

A robust performance in Q4 and in 2013 clearly signifies its customers' confidence in its ability to help them address IT requirements of both today and tomorrow. VMware is focused on three strategic priorities, and continues to execute well to accelerate growth and deliver in the long run.

VMware's SDDC (Software Defined Data Center) is finding strong adoption. Global brands such as McKesson (NYSE:MCK), Starbucks (NASDAQ:SBUX), Medtronic (NYSE:MDT), Best Buy (NYSE:BBY), and China Telecom (NYSE:CHA) are using the NSX, its network virtualization platform to make their networks more agile and efficient.

IT management is a critical component of SDDC, and it is growing rapidly and gaining share. VMware has added new cloud management capabilities to its portfolio, allowing IT teams to move at a faster pace to support the requirements.

The launch of vCloud Hybrid Service in May last year, followed by general availability in the U.S. in September and beta availability in the U.K. in December was one of the key reasons behind VMware's solid performance. The company has received positive response from customers for its hybrid cloud solutions.

Key acquisitions and other strategies

Recently, VMware entered into a definitive agreement to acquire AirWatch, a provider of enterprise global management and security solutions. This would lead to an improvement in VMware's end user computing group. With the addition of AirWatch, VMware's long-term growth will increase significantly by delivering a complete and proven enterprise-class solution for empowering the mobile workforce.

In addition, the acquisition of Desktone made VMware a key provider of desktop as a service (DaaS) solutions. The result of this acquisition has been positive, with a rapidly growing partner community, including tier one service providers, and a strong pipeline of customers modernizing and moving their desktop infrastructure to the cloud.

Since VMware's solutions allow customers to minimize their costs for their existing IT environments, along with building out the mobile cloud infrastructure to power their businesses in the future, the company is seeing good traction and revenue growth. This is reflected by the fact that VMware's total bookings in Q4 in the EMEA region grew in the double-digits.

VMware also boosted its strategic relationship with customers. It increased its ability to sell more products, and expanded its portfolio, leading to better demand for NSX and vCloud hybrid service in addition to vCloud Suites, management, automation, and EUC products.

The vCloud Suite and vSphere with operations management have been key to VMware's performance and this should continue in the future. Management and automation is one of VMware's fastest-growing product groups. Cloud management and automation were important drivers behind license bookings growth of over 40% last year. VMware believes that the path to the software defined data center goes through management and automation, and will continue to drive its growth in 2014 and beyond.

Valuation

Parameter

VMware Stats

Trailing P/E

46.90

Forward P/E

25.94

PEG Ratio

1.87

Earnings growth (next 5 years)

16.55%

Quarterly Revenue Growth (y-o-y)

14.70%

Diluted EPS (ttm)

$2.34

Quarterly Earnings Growth (y-o-y)

62.60%

Click to enlarge

Source: Yahoo Finance

VMware looks expensive on a trailing P/E basis as we see above, but its forward P/E ratio of 25.94 shows that earnings growth is expected in the future. Quarterly revenue and earnings growth are also quite impressive, while the forecast for the next five years shows that investors can expect better returns from the stock.

Conclusion

VMware has enjoyed solid growth this year and there are no signs of it stopping. The growth in software defined networks and hybrid cloud have helped VMware outperform and its suite of products should ensure that the good times continue. In addition, it has reported solid earnings growth so far and the projection for the future also looks quite positive. So, investors should definitely consider an investment in VMware to benefit from the growth in cloud and virtualization.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.